Economics Definition of Capital

Capital in common usage refers to finance, credit, and money.

And while occasionally that is the meaning it can have in economics, that is not what it properly means when discussing the operation of an economy Opens in new window.

Perhaps we should make the distinction between financial capital which is money and credit, and the capital stock which is the actual implements used in production.

When we talk about capital in economics Opens in new window, we are almost invariably talking about physical capital (or physical inputs) into the production process that have themselves been created by the production process.

Physical capital (or just capital), therefore, refers to manufactured goods that are used to produce other goods and services.

Examples of capital are:

The total amount of physical capital available in a country is known as the country’s capital stock.

Increases in Capital per Hour Worked

Workers today in high-income countries such as Australia have more physical capital available than workers in low-income countries or workers in the high-income countries of 100 years ago.

It is improvements in capital in its widest sense that cause economic growth Opens in new window, not just the amount of capital but the technical capabilities as well.

Human capital refers to the accumulated knowledge and skills workers acquire from education and training or from their life experiences.

For example, workers with a tertiary education generally have more skills and are more productive than workers who have only a high school qualification.

Increases in human capital are particularly important in stimulating economic growth.

As the capital stock per hour worked increases, worker productivity increases.

A secretary with a personal computer can produce more documents per day than a secretary who has only a typewriter. A worker with a backhoe can excavate more earth than a worker who has only a spade.

We can conclude that an economy Opens in new window grows, in large part, not just because it has more capital but also because capital has become more productive through innovation Opens in new window and technological changes Opens in new window.